Krugman and ‘what Keynes really meant’

Paul Krugman has often been criticized by people like yours truly for getting things pretty wrong on the economics of John Maynard Keynes.
When Krugman has responded to the critique, by himself rather gratuitously portrayed as about ‘what Keynes really meant,’ the overall conclusion is — ‘Krugman doesn’t care.’

Surely we don’t want to do economics via textual analysis of the masters. The questions one should ask about any economic approach are whether it helps us understand what’s going on, and whether it provides useful guidance for decisions.

So I don’t care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and neither should you.

The reason for this rather debonair attitude seems to be that history of economic thought may be OK, but what really counts is if reading Keynes gives birth to new and interesting insights and ideas.

No serious economist would question that explaining and understanding ‘what’s going on’ in our economies is the most important task economists can set themselves — but it is not theonly task. And to compare one’s favourite economic gadget model to what ‘austerians’ and other madmen from Chicago have conjured up, well, that’s like playing tennis with the nets down, and we have to have higher aspirations as scientists.

Although I have a lot of sympathy for Krugman’s view on authority, there is also a somewhat disturbing and unbecoming coquetting in his attitude towards the great forerunners he is discussing. Krugman is a great economist, but it smacks not so little of hubris to simply say ‘if where you take the idea is very different from what the great man said somewhere else in his book, so what?’ Physicists arguing like that when discussing Newton, Einstein, Bohr or Feynman would not be taken seriously.

Krugman’s comment on this issue is interesting, however, because it sheds light on a kind of inconsistency in his own art of argumentation. Krugman has repeatedly criticized mainstream economics for using to much (bad) mathematics and axiomatics in their model-building endeavours. But when it comes to defending his own position on various issues, he usually himself ultimately falls back on the same kind of models. Models that actually, when it comes to methodology and assumptions, have a lot in common with the kind of model-building he otherwise criticizes. And although Krugman says that he is a strong believer in ‘simple models,’ those models are far from simple (at least not in any interesting meaning of the word).

But the absolute all-time low in Krugman’s response to his critics is this remarkable passage:

Has declaring uncertainty to be unquantifiable, and mathematical modeling in any form foolish, been productive? Remember, that’s what the Austrians say too.

I won’t comment on the shameful guilt-by-association part of the quote, but reuncertainty it’s absolutely gobsmacking how Krugman manages to mix up theontological question — is the economy permeated by calculable risk or by genuine and often uncalculable uncertainty — with theepistemological question — how do we manage to analyze/understand/explain/model such an economy. Here Krugman seems to say — much in the spirit of Robert Lucas — that if reality is uncertain and non-ergodic, well then let’s just pretend it’s ergodic and susceptible to standard probabilistic analysis, so that we can go on with our FORTRAN programs and mathematical models! In other areas of science that would rightfully be considered fraud, but in ‘modern’ neoclassical mainstream economics it’s obviously thought of as an unprobematical and justified procedure.

Where does all this leave us? Well, I for one, is not the least impressed by Krugman’s gadget interpretation of economics. And if labels are as uninteresting as he says — well, then I suggest Krugman and other ‘New Keynesians’ stop calling themselves Keynesians at all. I’m pretty sure Keynes would have appreciated not having his theories and thoughts being referred to by people having preciously little to do with those theories and thoughts.

Studying great forerunners like Keynes may help us to construct better and more relevant economic models – models that really help us to explain and understand reality. So when Krugman writes

Second — and this plays a surprisingly big role in my own pedagogical thinking — we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility

I would certainly recommend him to compare his own statement with what Keynes himself wrote:

Though we all started out in the same direction, we soon parted company into two main groups. What made the cleavage that thus divided us?

On the one side were those who believed that the existing economic system is in the long run self-adjusting, though with creaks and groans and jerks, and interrupted by time-lags, outside interference and mistakes … These economists did not, of course, believe that the system is automatic or immediately self-adjusting, but they did maintain that it has an inherent tendency towards self-adjustment, if it is not interfered with, and if the action of change and chance is not too rapid.

Those on the other side of the gulf, however, rejected the idea that the existing economic system is, in any significant sense, self-adjusting. They believed that the failure of effective demand to reach the full potentialities of supply, in spite of human psychological demand being immensely far from satisfied for the vast majority of individuals, is due to much more fundamental causes …

The gulf between these two schools of thought is deeper, I believe, than most of those on either side of it realize. On which side does the essential truth lie?

The strength of the self-adjusting school depends on its having behind it almost the whole body of organized economic thinking and doctrine of the last hundred years. This is a formidable power. It is the product of acute minds and has persuaded and convinced the great majority of the intelligent and disinterested persons who have studied it. It has vast prestige and a more far-reaching influence than is obvious. For it lies behind the education and the habitual modes of thought, not only of economists but of bankers and business men and civil servants and politicians of all parties …

Thus, if the heretics on the other side of the gulf are to demolish the forces of nineteenth-century orthodoxy … they must attack them in their citadel … Now Irange myself with the heretics. I believe their flair and their instinct move them towards the right conclusion. But I was brought up in the citadel and I recognize its power and might … For me, therefore, it is impossible to rest satisfied until I can put my finger on the flaw in the part of the orthodox reasoning that leads to the conclusions that for various reasons seem to me to be inacceptable. I believe that I am on my way to do so. There is, I am convinced, a fatal flaw in that part of the orthodox reasoning that deals with the theory of what determines the level of effective demand and the volume of aggregate employment …

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What Keynes really meant but could not really prove
Comment Lars Syll on ‘Krugman and “what Keynes really meant”’

Keynes clearly saw that economics of his time was just a matter of belief: “On the one side were those who believed that the existing economic system is in the long run self-adjusting, though with creaks and groans and jerks, … Those on the other side of the gulf, however, rejected the idea that the existing economic system is, in any significant sense, self-adjusting.” (See intro)

Belief is the very opposite of science. Science is about knowledge. And scientific knowledge is clearly defined by material and formal consistency. What Keynes meant is that there are two beliefs about the economy and that no side could prove their case. From this follows: “Thus, if the heretics on the other side of the gulf are to demolish the forces of nineteenth-century orthodoxy … they must attack them in their citadel … … There is, I am convinced, a fatal flaw in that part of the orthodox reasoning that deals with the theory of what determines the level of effective demand and the volume of aggregate employment …”

Neither Keynes nor the After-Keynesians, though, delivered anything that came close to a scientific proof. All controversy remained on the level of opinion and belief. So let us now prove that the market economy is NOT self-adjusting as Orthodoxy claims.

This formal core, a.k.a. axiom set, is false, just as the Walrasian axiom set, a.k.a. citadel, is false. Consequently, what has to be done is to fully replace Keynes’s formal starting point. This is achieved as follows.
(A0) The objectively given and most elementary configuration of the (world-) economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm.
(A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L,
(A2) O=RL output O is equal to productivity R times working hours L,
(A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

For the graphical representation of the ABSOLUTE formal MINIMUM see link #1. A1 to A3 asserts: At any given level of employment L, the wage income Yw that is generated in the consolidated business sector follows by multiplication with the wage rate W. On the real side, output O follows by multiplication with the productivity R. Finally, the price P follows as the dependent variable under the ADDED preliminary conditions of (i) budget balancing, i.e. C=Yw, and (ii), market clearing, i.e. X=O.

Under the conditions (i)|(ii) the price is derived in each period as P=W/R (1), i.e. the market clearing price is in the most elementary case equal to unit wage costs. This is the simplest form of the Law of Supply and Demand. It holds for the economy as a WHOLE.

The first point to notice is that the real wage W/P is invariably equal to the productivity R according to (1). So, for the economy as a whole the marginal principle does NOT hold. This is the first blow for the citadel.

The second point to notice is that monetary profit, i.e. Qm=C-Yw, in the most elementary case of the pure consumption economy is zero because of (i). For profit/loss to emerge this condition has to be lifted.

Note that the product market is cleared due to condition (ii), and it has been left open so far HOW this is done in practical detail. These details are not needed at the moment.

It is assumed now that actual employment L is below full employment Lf. There is no need to define Lf at this stage in greater detail.

Now, the orthodox behavioral assumption is added that the wage rate W falls as long as there is unemployment, i.e. as long as L-Lf is less than 0. What happens then? From (1) follows that the price falls and that the real wage is invariably equal to the productivity R. The profit of the business sector is again zero. Hence, the wage reduction does NOT increase profit.

For the firm/business sector there is no motive to move in any direction. All employment levels are INDIFFERENT with regard to profit. There is NO such thing as equilibrium/ disequilibrium. The wage reduction can be repeated for an arbitrary number of periods, the only result is deflation. The flexible fall of the wage rate cannot clear the labor market. This is the second blow for the citadel.

Up to this point we have dealt with the pure consumption economy. Perhaps things change when the business sector is differentiated? So, in the next step the investment economy has to be investigated.

To cut the meticulous formal derivation short (2012; 2014a; 2014b), the most elementary version of the employment equation for the economy as a whole is given with link #2. From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the letter rho stands for ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and import/export. Employment is now the dependent variable, the price is among the independent variables.

Item (i) and (ii) cover Keynes’s arguments about effective demand. What is missing in the Keynesian employment multiplier, though, is the ratio rhoF as defined in (iii). This variable embodies the price mechanism. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.

This is the very OPPOSITE of what economics teaches. “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed. Applied to economy-wide unemployment, this doctrine places the blame on trade unions and governments, not on any failure of competitive markets.” (Tobin, 1997, p. 11)

The orthodox adaption rule for competitive markets DESTABILIZES the system. The system is NOT self-adjusting. This is the third and final blow for the citadel. Note that all this is no longer a matter of belief and wish-wash but of proof. The employment equation is formally consistent and because it consists of measurable variables its material consistency can be readily established through testing. This settles the matter once and for all according to the immutable scientific criteria of true/false.

What if he had turned to entropy and clear accounting for contributions from natural resources and public goods? John Maynard Keynes was not absorbed with inventing a way out of impending specie suicide.

Or was he? I read some of his work very long ago. Could it be that I enjoyed the way he wrote?

Of course, J.M Keynes was the first man with Georsescu-Roegen to invent natural resources economics. Keynes was the first to study relations between the three main systems which make economy running (Employment, Money, Interest) coming from working which is the world life since human exist . That is why there are problems when we forgot it. That is exactly what I tried to explain in my book “Money, how to flip the table off” (Amazon)

I recently wrote a paper published b Gorge Soros’s funded INET [Institute for New Economic Thinking ] explaining why all mainstream “Keynesians” did not know Keynes’s General Theory’s explanation of involuntary unemployment. I demonstrate how Keynes can gt involuntary unemployment explained even in an economy with perfectly flexible money wages and prices.

the result is even more different when Keynes’s analysis is used to solve the problem of imbalances in the international payments of nations. Mainstream “Keynesian’s” invoke the necessity of the deficit balance of payments nation must devalue its currency to make its domestic industries more “competitive” on the international markets. But on pages
338-9 of the General Theory Keynes explains why this can be misleading and in the “Keynes Plan” presented at Bretton Woods Keynes placed the onus of correction of imbalances on the creditor nation!
You may download my paper from INET or from my webpage at the University of Tennessee.

Yes or No: Is the economy self-adjusting?
Comment on Paul Davidson on ‘Krugman and “what Keynes really meant”’

Thank you for the reference to your INET article.* It covers the whole range of controversies between Keynes and what he called the citadel or Orthodoxy. The stated purpose of my post, though, is just the opposite, it is to focus exclusively on ONE point, the key point.

My understanding is the same as Keynes’s: “We are … at one of those uncommon junctures of human affairs where we can be saved by the solution of an intellectual problem, and in no other way.”**

The only way the key question can be solved is by scientific proof. Proof has two dimensions: formal AND material consistency. Roughly speaking the procedure is as follows: (i) state your premises with utmost clarity, (ii) do NOT take outcomes into the premises (e.g. equilibrium = petitio principii), (iii) do NOT take nonentities into the premises (e.g. optimization, ergodicity, rational expectations), (iv) start with the MINIMUM of premises (= Ockham’s razor), (v) derive the conclusions consistently from the premises, (vi) test the conclusions.

So, the key question is ‘Is the economy self-adjusting?’ and NOT how Keynes’s ideas have been perverted from Samuelson onward to Krugman. This is a legitimate question in itself, of course, but does not bear upon the key question which is about the working of the economy and NOT about the working of academic discourse.

What is needed are the objective determinants of employment/unemployment and NOT the accustomed silly second-guessing of human nature/behavior. The most elementary version of the employment equation for the economy as a whole which satisfies the methodological requirements (i) to (v) is given with link #1 (2012).

This equation embodies the price mechanism and the interaction between TWO markets, the product and the labor market. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa. This means that the orthodox rule, i.e. the remedy for excess supply is a reduction in price, does NOT apply to the labor market. This means in turn that Orthodoxy got the interaction of the two pivotal markets wrong. The Walrasian/Hayekian/Lucasian/Krugmanian story of market coordination is provably false.

The structural instability is a feature, not a bug. So, the filibuster about flexibility/stickiness or short run/long run is way beside the point.

All this follows from the correct employment equation, which in turn follows from three elementary structural premises. After having established formal consistency the only thing that has to be done by Heterodoxy is to establish material consistency, that is, to empirically test the equation. To continue the discussion of what Keynes or Krugman meant or means is practical idiocy.

the key question is what causes changes in employment and output in a capitalist market oriented economy. The answer is changes in the market demand for the products of industry. If we are in a moment of high unemployment and output, then the only thing that will induce entrepreneurs to hirer more workers and produce more output is the belief that market demand for their products has increased sufficiently so that it is profitable to work at a higher level of output and employment.

If you believe business firms are in the business of making as much profits as possible from sales revenue than one need no further statement than the one above.
A self correcting economy would be one that assures that market demand is always automatically restored to full employment without any change in policy, etc.

Could we, please, all focus on the key question of economics?
Comment on Paul Davidson on ‘Krugman and “what Keynes really meant”’

Keynes characterized the situation as follows: “Though we all started out in the same direction, we soon parted company into two main groups. What made the cleavage that thus divided us?” (See intro)

The key question that divides Orthodoxy and Heterodoxy is, in Keynes’s own words: “… is the existing economic system in any significant sense self-adjusting.”

You say “the key question is what causes changes in employment and output in a capitalist market oriented economy?”

I have answered this question above with the elementary structural employment equation which reads

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment L (the letter rho stands for ratio).
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation is a bit longer and contains in addition profit distribution, public deficit spending, and import/export.

Item (i) and (ii) cover Keynes’s arguments about effective demand. So, the structural employment equation contains your argument about the determinants of employment: “The answer is changes in the market demand for the products of industry.”

Can we put this undisputed stuff now beside? The critical point is that the original Keynesian multiplier 1/1-c is incomplete, to put it mildly (2012). What is missing is the ratio rhoF as defined in (iii). This variable embodies the price mechanism. It works such that overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.

Now, every half-witted supply-demand-equilibrium economist fancies that the remedy for excess supply in any market is a reduction in price. From whence the claim comes that wage reductions will — in principle — restore full employment. This is the essence of the self-adjustment claim. The strong version, though, is regularly wish-washed by admitting practical hindrances, delays, and imperfections.

The structural employment equation says that wage reductions INCREASE unemployment which means that the market system is — in principle — self-destabilizing. The structural employment equation is composed of measurable variables and therefore readily testable. So, Keynes’s key question is unequivocally answerable.

What Post Keynesians have overlooked is that there are TWO ratios in the multiplier, the expenditure ratio rhoE and the factor cost ratio rhoF. For economic policy this means: an increase of the expenditure ratio can be counteracted at any time by a decrease of the factor cost ratio, that is, by a falling average wage rate or by a rising average price. The hitherto missing variable explains why Keynesian demand policies are sometimes effective and sometimes ineffective.

This, though, is an implication of the key point. The key point is that the price mechanism does NOT stabilize the market system, neither in the short nor in the long run. This systemic feature cannot be cured by Keynesian demand management.

The correct answer to Keynes’s question “is the existing economic system in any significant sense self-adjusting?” is NO because (i) aggregate demand is not self-adjusting, and (ii), the structural interrelation between (average) wage rate, price, productivity, and employment moves the system farther away from full employment. (2014).

Post Keynesians have to be criticized for overlooking (ii) which proves that they have no idea about how (a) the price mechanism works, and (b), the profit mechanism works.

Larry Motuz “Just ran across http://cvazquez.webs.uvigo.es/articulos/JME1999.pdf“. Interesting. The Generalised Marginal Rate of Substitution ends up being a real number which is not defined. In other words, if recorded in the data files we used with Algol68R, it would end up spelling the word “FOOL”.

Lars Syll is again sniping somewhat unconstructively at Paul Krugman, if valuably giving us the brief link “say” to what he’s talking about: http://www.princeton.edu/~pkrugman/keynes_and_the_moderns.pdf. I don’t know whether Egmont is a FOOL or a rogue, but in his current intervention he is again repeating the lie that on p.63 of the General Theory Keynes is formulating the formal core of the General Theory”. What Keynes actually said was:

“Provided it is agreed that income is equal to the value of current output, that current investment is equal to that part of current output which is not consumed, and that saving is equal to the excess of income over consumption – all of which is conformable both to common sense and to the traditional usage of the great majority of economists – the equality of savings and investment necessarily follows. In short – [what Egmont is objecting to]. Thus ANY set of definitions which satisfy the above conditions leads to the same conclusion. It is only by denying the validity of one or the other of them that the conclusion can be avoided”.

Which is precisely what Keynes proceeded to do, and his whole argument proceeds from. On p.65 he insists that “The amounts of aggregate income and of aggregate saving are the RESULTS of the free choices of individuals whether or not to consume and whether or not to invest; but they are neither of them capable of assuming an independent value resulting from a separate set of decisions concerning consumption and investment. In accordance with this principle, the conception of the PROPENSITY TO CONSUME will take the the place of the propensity or disposition to save”.

This, surely, is an inversion logically equivalent to Copernicus’s revolution.

Nevertheless Paul Krugman doesn’t “care whether Hicksian IS-LM is Keynesian in the sense that Keynes himself would have approved of it, and [he says] neither should you.” Like Egmont, he preceeds in his .pdf to cite the starting point of Keynes’ argument as its conclusion: “The value of D at the point of the aggregate demand function, where it is intersected by the aggregate supply function, will be called THE EFFECTIVE DEMAND”. Yet turning Keynes’ page from 25 to 26, Keynes says the classical theory interprets this as D having “a unique equilibrium value”, whereas in fact it has “an infinite range of values all equally admissible, and the amount of employment is indeterminate except insofar as the marginal disutility of labour sets an upper limit”. By p.50 he is arguing that “the level of employment [and hence aggregate wages] depends, in a sense, not merely on the existing state of expectation but on the states of expectation which have existed over a certain past period. Nevertheless … today’s employment can be correctly described as being governed by today’s expectation”. Nevertheless (!), by the Chapter 12 which Krugman belittles, he has moved on to long-term expectations. …

So we have the unedifying sight of so-called “Keynesian” Paul Krugman telling us it doesn’t matter that Keynes had moved from what my Oxford Dictionary of Economics describes as the “comparative static analysis” of the IS/LM model to one in which variability with time is embodied in a past?” In the cybernetic (steering) model, it doesn’t matter that over time a ship drifts off course even though in the short term the steersman keeps it pointing in what used to be the right direction to reach its goal? After all, Krugman insinuates, Keynes was
not a great man seeing further by standing on great men’s shoulders (if necessarily seeing only hazily the approaching future – the post-war emergence and development of dynamic PID control servos from Shannon’s theory of error correction in information and communication systems). Keynes, we are told, was “just a man”.

Lars’s concluding focus is spot on. He has Krugman telling us “we do want, somewhere along the way, to get across the notion of the self-correcting economy … a tendency to return to full employment via price flexibility”, and Keynes convinced there is a “fatal flaw” in this “theory of what determines the level of effective demand”. The difference is that between the AUTOMATA which frightened Mirowski off information science in “Machine Dreams”, and the SERVOs which help navigators and technologists NOT to determine outcomes once and for all but to ACHIEVE THEIR AIMS by means of continuous or in any case decisive interventions: “decisive” in the sense of involving at least temporary change of aim, as when a navigator changes course to avoid an approaching ship (or iceberg). The economy of Keynes’s time having hit its largely hidden iceberg and produced the Great Slump, his conviction of error and practical solution of government intervention were well motivated. The economists of our time need to get their heads round the meaning of PID: that their lives and work, like the economy, have a past and a future as well as a present, so that the owners of the Titanic cannot safely order “full speed ahead” without allowing its captain, officers, lookout and steersman the “slack” necessary for them to do their own jobs.

I’m probably wasting my time pointing all this out to economists, but their antipathy to government may leave them open to the evidence that the crew of the Ship of State does not dictate the activity of every other ship, as those led by Stalin and Thatcher tried to do. Rather, they lay down the laws (conventions) of the sea and (overlooking themselves) require the masters of all other ships to learn the rules of PID (how to navigate) before they are allowed to endanger others when doing their own thing. I point to this having been involved both with early electronic industrial process control systems and experiments with computer-aided management (largely unsuccessful because of managers expecting them to make their decisions for them). Goodness! It has been over fifty years since PID theory first emerged from the need to control phase errors in precision oscillators; and economists like Krugman, for all their eloquence, still haven’t a clue!

“Keynes says the classical theory interprets this as D having “a unique equilibrium value”, whereas in fact it has “an infinite range of values all equally admissible, and the amount of employment is indeterminate except insofar as the marginal disutility of labour sets an upper limit”. By p.50 he is arguing that “the level of employment [and hence aggregate wages] depends, in a sense, not merely on the existing state of expectation but on the states of expectation which have existed over a certain past period. Nevertheless … today’s employment can be correctly described as being governed by today’s expectation”.

At the heart of IS-LM analysis is the notion of a unique equilibrium, one that seems to depend upon ‘utility’ maximization (however undefined ‘utility’ is) and ‘allocative efficiency”. Even if we were to grant the ‘utility’ hypothesis and the ‘rational consumer’ hypotheses it is a considerable stretch of the imagination to believe that the expectations of producers as to what they can sell at various prices is commensurate with the expectations of consumers about what they would be prepared to buy at those self-same prices.

Indeed, the very idea of equilibria in markets (and of consumers) needs to be discarded in favor of establishing the conditions wherein markets are clearing versus where they are not. In most cases, markets do not clear.

Keynes most certainly did not believe in equilibria…whereas Hicks’ IS-LM is simply a means of preserving what-never-was-and-never-will-be.

Thank you, Larry. I’d looked at your “in favor of establishing the conditions wherein markets are clearing versus when they are not” in the mathematical terms of which was the dependent variable in the relationship.

There were two ways Egmont could have come to terms with what (in context) Keynes was actuaIly saying in his “General Theory”: he could have corrected his sentence to refer to the ORTHODOX general theory, or he could have said “Well anyway …” and moved on. I’m glad to see that in his very interesting contributions on May 23rd and 24th he has effectively done the latter, for now (even though we have differences of perspective) we are at least discussing the same real issues. For convenience I’ll repeat his position here:

“The stated purpose of my post, though, is just the opposite, it is to focus exclusively on ONE point, the key point.

“My understanding is the same as Keynes’s: “We are … at one of those uncommon junctures of human affairs where we can be saved by the solution of an intellectual problem, and in no other way.”**

“The only way the key question can be solved is by scientific proof. Proof has two dimensions: formal AND material consistency. Roughly speaking the procedure is as follows: (i) state your premises with utmost clarity, (ii) do NOT take outcomes into the premises (e.g. equilibrium = petitio principii), (iii) do NOT take nonentities into the premises (e.g. optimization, ergodicity, rational expectations), (iv) start with the MINIMUM of premises (= Ockham’s razor), (v) derive the conclusions consistently from the premises, (vi) test the conclusions.

“So, the key question is ‘Is the economy self-adjusting?’ and NOT how Keynes’s ideas have been perverted from Samuelson onward to Krugman”.

To which paras my responses are, in brief, “yes, yes, no, yes”. In response to Keynes’s call for “the solution of an intellectual problem”, my argument is that the problem lies deeper than scientific proof. It lies in a philosophical decision whether to recognise – as an “entity” at (iii) – invisible (dark?) energy as well as things; for without energetic motion (in older terminology God’s “spirit”, the windpower breathing life into us), change – not to say observation – is impossible and time non-existent or a mere artefact of observation. Where Hume characterised science on the basis of his choice not to be believe in energy he couldn’t see, I say that (iv) should refer to the NECESSARY minimum of premises and that (without light particularly from the discovery of electric circuits and evolution) Hume reformulated the modern (Baconian) scientific method with less than that. So let me rephrase Egmont’s key question in light of this and our objection to deterministic equilibrium:

“Can the economy become self-adjusting? If so, how and to what?”

Yes. We now have the possibility of evolution: of an economy having changed its form and/or objectives, from imperfectly achieving the set of dynamic objectives which characterise the diverse aims of an economy (from living and developing humanly by means of production and distribution of goods and coordination of communal activities) to perfectly but self-destructively achieving a single objective which does not, e.g. ape-like “alpha male” domination by means of the money-making which characterises chrematism

Sadly, on the evidence this seems to have happened. In order to “re-adjust it” back, there are in my opinion two necessary responses to it.

(i) It is time to call a spade a spade, i.e. to insist that what we now have is not intelligent economics but sub-human chrematism, and that what we call money is not wealth but a credit limit, such that £100 authorises one to indebt oneself to the community for up to £100 worth of goods, repayable by contributions to the well-being of the community.

(ii) It is time to bring some responsibility back into the system by (a) Academics seriously evaluating the ability of the credit card system to issue credit to all in accordance with their two-fold needs: for the means of living decently and (with others) of repaying it gratefully by doing the work necessary to regenerate what they have used. (b) Business men seriously considering whether wealth is earned by socially beneficial projects or by forcing others to meet the demands of fraudulent bankers. (c) Politicians advised by academics and business men (other than chrematists) defining money legally as a credit limit (enabling a Citizen’s Income to be made available to all), and ownership as a right accompanied by responsibility for maintenance (creating a disincentive to accumulating more than is necessary). (d) Bankers accepting that they can earn significant credit by successfully running automated credit expenditure accounting systems without need of usurious “financial assets”.

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• Do not post slight variations of the same comment under multiple posts.
• Show your fellow discussants the same courtesy you would if you were sitting around a table with them.